Why startups fail and how to build better ones

Having a unique technology that can be used to solve problems at scale gives you an edge, and these cos have built their business models on such technologies.ET CONTRIBUTORS | January 15, 2017, 08:34 IST

At the end of 14th century, Unicorn was a common theme in medieval and renaissance works of art and literature. The ‘Hunt for the Unicorn’ a series of seven tapestries displays hunters and noblemen in pursuit of the legendary unicorn. Who knew the hunt would resurface again in this century?

Only this time, Unicorns are startups with a billion dollar valuation, the hunters are replaced by venture capitalists, noblemen by tech entrepreneurs and tapestry with news media which doles out tonnes of high octane startup stories of gluttony, contentment and fiascos. Indian startup ecosystem from 2014 through 2016 was a near emulation of the California Gold Rush – some found gold and made a fortune (entrepreneurs & employees), some made rich by selling shovels (vendors & partners), and a lot of unlucky ones died trying (VCs who burnt a lot of money).

We are at a pivotal point. Some of the hottest startups with north of 30 million have fallen by the way side just under 24 months since inception. VCs are hibernating in the ‘funding winter’ caused by absence of any big bang returns they promised their principals. Is this it?

Grab some popcorn, for this is a long story about how fundamentals of business strategy has remained unchanged over time and constantly proves why Having & retaining competitive advantage (CA) is more crucial than speed of growth. Value (V) creation over valuation. Why execution (E) matters more than ideas. Let’s call it as CAVE principles.

Trajectory of the ' J curve'All along human history, every era has a radical tent pole business that made a few people rich, powerful and famous. Along the way it would create a revolution, challenge the status quo, overturn conventions of that time period and bestow the accrued benefits to an entire civilization or people of a region. The kings built temples and monuments, sailors explored new trade routes and discovered islands, industrialists built factories that can manufacture pots & pans to aeroplanes, corporates built public limited companies, and today, tech entrepreneurs are building startups.

What’s interesting about the evolution of such tent pole business is how did they reached top of a curve and then how did they stay there for long? This is similar to the J curve VCs expect their portfolio companies to chase. Historically, era appropriate ventures that follow the CAVE principles seem to have hit J curve. The Kailash temple in Ellora, Maharashtra tells us a great deal about executing a great idea with even greater perseverance. Built during the 8th century, it took over 135 years and spanned four generations of Rashtrakutas kings who built it without questioning the original idea. It was not built stone-by-stone but rather a mountain was carved out to make a temple with layers of sanctums and shrines.

Archaeologists are unsuccessful in concluding how or what technologies were used to create this unique rock-cut structure in the world. Something similar happens in tech industry where a patent or unique algorithm gives the competitive edge to a business model built on top of it. While the competition struggles to emulate the same, the first mover raises to a monopoly.

Similar to how the rock cutting techniques gave Kailash temple the competitive advantage, consider Google’s PageRank, Tesla car’s batteries or Facebook’s EdgeRank, this is what make them unique at a kernel level.

Technology to the rescueHaving a unique technology that can be used to solve problems at scale gives you an edge, and these companies have built their business models on such technologies which is raking in billions of dollars in revenue.

Compare this to the copycat businesses spun off by Rocket Internet which eventually has to sell Jabong and FabFurnish in a fire sale. Many stories have been written on how the fear of missing out (FOMO) factor has given rise to VCs writing cheques to copycat startups who have no novel technology but only a business model.

At one point it was really easy to explain a business to a prospective investor, all that to be said was, we are an Uber-for-X or an Amazon-for-Y. Since customers were renting movies to maids online on an on-demand basis, gig economy & marketplaces did seem attractive garnering millions in funding. But is the market ready? Are customers willing to pay? Can competition emulate your offer better than you do? Who has time to do due diligence when the Gold Rush is on and the neighbour is raking all the perceived benefits?

Crash and burn?The last six months alone has been agonising, Peppertap, Doormint, TinyOwl wound up. Zomato and Grofers downsized their operations. Flipkart’s valuation was repeatedly slashed. SoftBank wrote down &550 million, their investments in Ola & Snapdeal. And we all survived to see a grand epilogue - Housing.com merging for all stock deal which ends the biggest drama of the decade.

Having original technology are inevitable to qualify as a tech startup. In the true spirit of building tech products, only the proprietary or patentable technology can elevate the business to near monopoly, not advertising and heavy discount. Businesses that enjoy monopoly status are hard to replicate and seldom die easy. In case of Kailash temple, let alone anyone recreating the rock-cut structures, it could not even be destroyed when Mughal king Aurangzeb ordered one thousand men to destroy the temple. After many months of futile attempt, his men could only scratch the surface and disfigure a few sculptures.

Consider this statement from Navneet Singh, co-founder of PepperTap who wrote on YourStory “Our customers were, at times, unable to see the entire selection of items from a store and sometimes even essential items were missing from the catalogue visible to them”. In other words, a grocery app which had no technology to show the groceries available to a customer who is looking to buy them at the first place. PepperTap did not just lack having a competitive advantage, they sucked at having what it takes to be in tech business. The lesson here is the first principle of CAVE - build competitive advantage through technology, work on business models that can elevate to a monopoly.

Going back, looking aheadIn more modern times, stories from the house of Tata tells us a lot about the CAVE principles in play. The foundation stone of arguably India’s most valuable and reputed company was laid by a 29 year old Jamsetji Tata in 1868. His philosophy was, Industrialization can leads to India’s economic development. A century and half later Tata has grown from strength to strength like a banyan tree. It has survived colonial British rule, two world wars, liberalization of licence raj in 90s, a terrorist attack on its property, and the global economy crisis of 2008 and yet it stands tall. While its wide diversifications from salt to software has created wealth and value for all stakeholders, Tata’s contribution to nation building is profound as it pioneered and paved way for nuclear, aviation, and telecommunication industries to take off in India.

Unlike Jamsetji, today’s 29 year olds seem to follow a different wisdom “Move fast and break things. Unless you are breaking stuff, you are not moving fast enough." Facebook founder and CEO Mark Zuckerberg said this few years ago and many tech entrepreneurs seem to have taken this quite literally. Moving fast is a war cry, an intonation to motivate and not a business goal by itself.

The actual lesson they must be learning is how Zuckerberg started Facebook to connect a small group of people at Harvard, tasted success, improved it, grew it ‘slowly’, resisted multiple buyout attempts, and eventually scaled it to connect a billion and half people today while creating value to investors and stakeholders.

This nugget from on-demand laundry service startup Doormint’s last email before shutting down explains the myopia faced by some startup founders and the impulsive rate at which inflated valuation figures investors fantasise. “The costs of processing clothes, pick up and drop logistics and packaging made it difficult to recover through prices”. Ask any dhobi (laundry guy) from one pin code next to where you live to service you at doorstep and he’ll tell you why he’s not interested; if you persist he may even explain why it’s not feasible. But for Doormint’s VCs it just cost three million dollars to learn this.

The ecosystem must let go the prevailing opinion that every business is ripe for disruption. Worst, if it worked elsewhere, we can make it work in India. All it takes is bunch of hoodie wielding developers who can code, investors who can write cheques to keep the lights on, and hang around in the startup ecosystem to give and take advice. The outcome of this move fast - break things are founders’ hubris, hibernating investors, erosion of confidence among white and blue collars alike to join startups, rupturing the market and making consumers sceptics.

We can’t solve startup problems with startup solutions, we need a business centric approach. A quick look at Fortune 500 companies in India reveals the top rank is for Indian Oil, a PSU. Also notable is that 200 out of 500 companies are family owned, out of which 32 were setup before 1947. TVS, Birla, Mahindra, Escorts are some of the companies who have been doing many thing well for a really long period time leading to every concerned person deriving value. A quintessential fit in CAVE principles. But guess what, familiarity breeds contempt and the last place a 21 year old IIT dude wants to take inspiration to build a startup does not happen to be his parent’s employer. Am I wrong about this?

(The author is a digital marketing professional. Views are personal. He tweets @sree_Raman)